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Strong MBS Demand Stays Ahead of Supply

Supply/demand technicals remained in MBS' favor this week. Supply averaged just over $2 billion per day, mostly in 4.5% coupons, staying similar to the previous week.

The Federal Reserve, of course, remained a substantial buyer, averaging $5.4 billion per day. Overseas investors were also a steady presence in the market, particularly in GNMAs, while money managers, banks, hedge funds, servicers, and others were two-way, although with a more supportive tendency.

Encouraging investors outside of the government was a sharp sell-off in Treasuries through mid-day Wednesday with the 10-year Treasury down 58 ticks from the previous Friday's close. Up until mid-day, MBS outperformed Treasurys by several ticks with up-in-coupon trades leading.

After the 10-year Treasury auction on Wednesday, Treasurys began to strengthen based on a variety of factors, including convexity-related buying in the rates market.

This led to over a one-point turnaround in the 10-year note and mortgages moved wider as profit taking emerged.

On Thursday, the 10-year ranged from 1/2 point lower to a half point higher over the session. Mortgages responded accordingly with investors outside of the Fed buying on weakness and taking profits on strength.

Mortgages held to form on Friday as a stronger Treasury market led to mortgage weakness on less support, more two-way flows as profit taking picked up, along with supply.

Overall, MBS volume was average for the week and similar to last week. In other mortgage-related activity, 15s mostly underperformed 30s; GNMA/FNMAs remained almost the same for the most part; conventional dollar rolls were active to start the week as a result of 48-hour notification; and specified pools were said to be move back and forth between active and quiet days.

Fed and Treasury MBS Purchases

The Treasury said it bought $12.7 billion in GSE MBS in February, down substantially from the $20 billion plus bought every month from October through January. That equates to $669 million MBS per day compared to over $1 billion per day average in the previous four months. To date, the Treasury has bought $106.9 billion since the program began in September.

Fed gross purchases of MBS for the March 5 through March11 period totaled $61.4 billion, with net purchases amounting to $27.1 billion. This results in a daily average purchase of $5.4 billion.

For the previous period, MBS net purchases were $30.1 billion, for a daily average of $6 billion. Total purchases by the Fed to date total $217.1 billion, or $4.7 billion per day on average. Under the current plan, the Fed still has $282.9 billion left to buy.

Week's Housing/Legislative Highlights

RealtyTrac reported foreclosure filings rose 6% in February from January to 290,631 properties, or 1 in every 440 households. From a year ago, foreclosure filings have surged 30%. James Saccacio, CEO of RealtyTrac, expressed some surprise at the increase "given that many of foreclosure prevention efforts and moratoria in place in January were extended through most of February as well." One exception, however, was Florida where a 45-day voluntary moratorium expired at the end of January. That state experienced a 14% surge in foreclosure filings.

* Treasury Secretary Timothy Geithner said a plan for dealing with banks' toxic assets is expected within the next couple of weeks. The plan would provide low cost funding from the government to private investors to buy troubled assets.

* House Representatives Adam Putnam (R-FL) and Edward Markey (D-MA) introduced legislation that would require Fannie Mae and Freddie Mac to pay registration fees and to disclose information required by the Securities and Exchagne Commission, just like other publicly traded companies and issuers of private label MBS are required to do. Putnam said in his press release that while there were factors involved in the current financial crisis, "and one of them was a failure to require enough transparency and accountability from Fannie and Freddie." The bill is called the Fannie Mae and Freddie Mac Full Disclosure Act.

* Senate Banking Committee Chairman Chris Dodd (D-CT), along with Senator Mike Crapo (R-ID)introduced the Depositor Protection Act of 2009 that would allow the Federal Deposit and Insurance Corp. to borrow as much as $500 billion from the Treasury to shore up its deposit insurance fund in the event of a major bank collapse.

* Senators Dick Durbin (D-IL) and Charles Schumer (D-NY) introduced legislation to create a Financial Product Safety Commission. This bill would create a government agency that would ensure "that the offering of financial products to consumers is responsible, accountable and transparent," according to a government press release. It also said the legislation would improve the "fractured oversight" of the financial markets in which none of the 10 current regulators have oversight as its primary objective which led to the explosion "of excessively costly or predatory consumer financial products."

Prepayment Outlook/MBS Supply

Prepayment speeds are projected 3% to 4% slower in March versus February according to our sample with paydowns estimated at just over $100 billion.

Factors influencing speeds include a decline in refinancing activity in February as borrowers waited for the lower mortgage rates the government said it wanted to achieve as well as the wait for the President Obama's Housing Plan and a higher day count. The Mortgage Banker Association's Refinance Index averaged 3469 in February compared with 5297 in January, while the number of collection days increases to 22 from 19.

Almost halfway through March, total gross issuance in agency MBS totals $121.3 billion compared to $100.3 billion in February.

Fannie Mae represents 56% of the issuance, Freddie Mac 25%, while Ginnie Mae trails at 19%.

Based on current expectations regarding prepayments for March, paydowns are estimated at about $101 billion which would make March the first positive net issuance month for this year. In January, net issuance was negative $16.9 billion and  negative $5.3 billion in February

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